The Effect of Carbon Pricing on Firm Emissions

Gustav Martinsson (Stockholm Business School) together with Laszlo Sajtos and Per Strömberg (Stockholm School of Economics) and Christian Thomann (Royal Institute of Technology) have got their article “The Effect of Carbon Pricing on Firm Emissions: Evidence from the Swedish CO2 Tax” accepted for publication in the Review of Financial Studies, one of the top journals in Finance.

The authors use Sweden as a laboratory setting to study how carbon pricing affects firm level CO2 emissions. Sweden is an ideal setting as it was one of the first countries to introduce a carbon tax in 1991. The group has assembled a unique dataset tracking CO2 emissions from Swedish manufacturing firms over 26 years. In the published paper, this dataset is used to estimate the impact of carbon pricing on firm-level emission intensities.

The main finding is the estimate of an emission-to-pricing elasticity of around two. Meaning, a one percent increase in a firm’s marginal cost of emitting CO2 leads to a reduction in CO2 emissions per unit of sales of about two percent. However, this elasticity varies substantially across subsectors and firms, where higher abatement costs and tighter financial constraints are associated with lower elasticities. A simple calibration suggests that 2015 CO2 emissions from Swedish manufacturing would have been roughly 30 percent higher without carbon pricing.